Understanding how to buy government bonds is not all that difficult once you get into the details. The variety of government bonds to invest in makes your choice of which, and where, to buy government bonds that little bit more complicated.
In this guide we will try to walk you through the basics of how to buy government bonds, along with some of the details of the varying types and risk levels. For the sake of this article, we are not going to dig specifically into the differences of each individual Country.
The basics of how to invest in government bonds remains true across US, EU, or UK government bonds; the main differentiator is the government stability and ability to honor the notes. Now let’s start at the beginning with a quick intro to what are government bonds, and the various types.
What Are Government Bonds Explained
Government bonds remain a very popular type of investment, even if there are many different competing instruments now available on the market.
Buying government bonds with high yields is often seen as a safe investment because the government effectively guarantees the payment of interest and principle. As a result, government bonds can be an attractive investment for people who are looking for a safe and secure place to invest their money.
Investing in government bonds can be a great way to diversify your portfolio and earn steady returns over time. But when it comes to investing in government bonds, there are many different factors to consider, including:
- the type of bond you want to purchase
- the credit rating of the government bonds investment
- the platform you use for trading or investing
- the fees associated with buying government bonds.
So now let’s break into the differences of the types of bonds and consider some the best government bonds to invest in.
What Are The Different Types Of Government Bonds?
There are many different types of government bonds, including treasury bonds, government agency bonds, and government sponsored enterprise bonds. Each type of government bond has its own benefits and risks.
Government Treasury Bonds
Treasury bonds are the most common type of government bond. They are backed by the full faith and credit of the US government. Treasury bonds are considered to be a very safe investment because the government has never defaulted on its debt obligations.
Government agency bonds are issued by government agencies, such as Fannie Mae and Freddie Mac. These agencies are not backed by the full faith and credit of the US government, but they are still considered to be fairly safe investments.
Government Sponsored Enterprise Bonds
Government-sponsored enterprise (GSE) bonds are issued by organizations that are created by the government to provide a specific service or function.
Examples of GSEs include the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae). GSE bonds are not backed by the government, but they are still considered to be fairly safe investments.
Savings bonds are issued by the government and are backed by the full faith and credit of the government. Savings bonds are considered to be very safe investments because the government has never defaulted on its debt obligations.
US Savings bonds can be started off with as little as $25 in many places, which makes this a readily accessible type of government bonds to buy.
Investing in municipal bonds is a common way for individuals and businesses to support their local communities and earn financial returns at the same time.
Municipal bonds are debt instruments issued by governments or government agencies to raise funds for various projects and initiatives. They are typically denominated in US dollars, although they can also be issued in other currencies.
TIPS and STRIPS
TIPS – Treasury Inflation-Protected Securities (TIPS), are government bonds that provide protection against inflation by tying the interest payments to changes in consumer price indices.
As such, TIPS are a popular investment option for individuals who want to preserve their purchasing power over time. TIPS are also considered a relatively safe investment, as they are backed by the full faith and credit of the US government.
STRIPS – Separate Trading of Registered Interest and Principal Securities, are another popular type of government bond. Like TIPS, strips provide investors with protection against inflation through interest payments tied to changes in consumer price indices.
However, unlike TIPS, strips do not offer protection against changes in the principal value of the bond. Instead, they are typically used by investors looking to generate steady income from interest payments over time.
Other Bond Types
Junk Bonds – Not a form of Government Bond.
Junk bonds are issued by companies, as a form of corporate bond. These are classified as junk due to the fact that they are likely in poor financial health.
These bonds carry a higher risk of default, but they also offer higher yields. Junk bonds are not backed by the government and are not considered to be safe investments.
Investment Grade Bonds
Investment grade bonds are considered to be a lower-risk investment option, as they are backed by companies with a high credit rating; associated with a greater chance of paying out interest and principal on time.
While investing in these bonds can provide you with steady returns over time, it is important to do your research beforehand to ensure that you are investing wisely.
Leveraged Bonds ETFs
One type of bond that you may consider investing in are leveraged bonds ETFs.
Leveraged bond ETFs are those that have been issued with the help of a loan, and they often offer higher interest rates than non-leveraged bonds.
While leveraged bonds can be a good way to boost your returns, it is important to remember that they come with a certain amount of risk, as the principal and interest payments can be affected by market volatility.
Before investing in leveraged bonds, it is important to do your research and carefully assess your financial goals and risk tolerance. Consider looking at historical data to gauge how leveraged bonds ETFs have performed in different market conditions, as well as consulting with a financial advisor to get a better sense of whether this type of investment is right for you.
Understanding Government Bonds Investment Risk
Getting a good understanding of risk is an important element in the process of learning how to buy government bonds.
Investing in government bonds can be a good way to diversify your investment portfolio and reduce your overall risk.
Government bonds are also available in a variety of different terms and yields.
There are two main ways to classify bond risk: by credit rating and by interest or yield rate.
Government Bond Credit Ratings
Bonds with high credit ratings are considered to be less risky than those with lower ratings. This is because bondholders with high credit ratings are more likely to repay their debts than those with lower ratings.
These risk levels range from AAA+ to D, with AAA being the highest bond rating and D being the lowest.
Government Bond Interest Rates
Interest rates also play a role in bond risk with the high yield government bonds not always being what you want.
That is because government bonds with high interest rates are generally considered to be more risky than those with lower rates. The pricing of government bonds from an interest rate or yield perspective is a highly complicated process and the credit ratings agencies usually do not get this too wrong.
One of the most simplest explanation for high yield government bonds being higher risk is because bondholders with higher interest rates are rated as more likely to default on their debt payments than those with lower rates.
Government Bonds Risk summary
Investors should always consider both credit rating and interest rate when determining the risk of a bond investment. By doing so, they can make more informed decisions about where to allocate their funds and maximize their potential returns.
Once you have got to grips with the different types of government bonds to invest in, and the higher risk in high yield government bonds; you are getting closer to deciding on how to buy government bonds.
This process is going to start with finding a trading platform, or online investment platform that supports bonds. The options of where to buy government bonds online are fewer than those in other trading instruments but we have broken down a few of the best options for you below.
Where To Buy Government Bonds Online, Then How
If you’re looking to invest in government bonds, then you’ll need to find a good broker or online trading platform that specializes in this type of instrument. Here are a few qualities to look for when choosing where to buy government bonds:
1. Reputation and experience.
A good government bond trading platform should have years of experience in the industry, as well as a strong track record for success. Look for platforms that are backed by reputable brokers or investment firms, as this can give you peace of mind when making your investment decisions.
2. Access to a wide range of bonds.
A good bond trading platform should offer access to a wide range of government bonds, including Treasury bonds, municipal bonds, and corporate bonds. This gives you flexibility and variety when choosing the right investments for your portfolio.
3. Competitive fees and commissions.
Finally, make sure to compare the fees and commissions charged by different government bond trading platforms before making your decision. While most platforms charge similar fees, some may be more expensive than others. Consider choosing the platform that offers the best value for your investment needs.
By following these tips, you can find a government bond trading platform that meets your needs and helps you achieve your investment goals. Whether you’re looking to invest in Treasuries, corporate bonds, or municipal bonds, there is a platform out there that can help you get started. We have listed a few of the best ones next.
Best Bond Trading Platforms
To find the best bond trading platform for your investing needs, it’s important to do your research and compare different options. Some key factors to consider when choosing a platform include the range of bonds available, user-friendly interface, security features, and fees and commissions.
Some popular platforms for investing in government bonds include Degiro, IG, Pepperstone, eToro, Saxobank, and CMC Markets. Each platform offers a different set of features, so it’s important to compare and find the one that suits you best.
Pepperstone offer free demo account to get up to speed with the platform
Trading US government bonds, or treasury bonds is made very simple with Pepperstone. The broker, whilst a forex and CFD trading specialist has a range of bonds that makes gaining access to this market as easy as any other instrument.
This only trading platform is available to users of many Countries, but unfortauntely at the time of writing, still not available to US residents.
IG have one of the best ranges of government bonds to invest in on the market
MINIMUM DEPOSIT – $50
REGULATION – DFSA, FCA, CySEC, ASIC, MAS, FSCA, BaFIN, FINMA
INSTRUMENTS – FOREX, CFDs, STOCKS, OPTIONS, SPREAD-BETTING
IG Bond trading platform, is known for its low fees and commissions, making it a popular choice among investors and traders alike. Possessing a wide range of government bonds available on this platform, you can easily diversify your portfolio and minimize your risk while investing in government bonds.
IG is a multi regulated trading platform broker with almost global reach, and makes trading bonds alongside your other instruments both affordable, and simple.
Degiro Are One Of The Best Platforms For Buying Bonds In Europe
MINIMUM DEPOSIT – $50
REGULATION – FCA, AFM
INSTRUMENTS – STOCKS, BONDS, INVESTMENT ACCOUNTS
Degiro is also a popular bond trading platform, and offers a user-friendly interface and a wide range of bonds to choose from. However, Degiro does have standard transaction fees that are different from than some other platforms, so it’s important to compare all your options before investing.
Even with the transactional fee, this is still one of the best brokers on which to buy government bonds in the UK.
One thing to consider is that Degiro broker is regulated in UK by the FCA, and the AFM in Netherlands. That means that this is a platform for bond trading in Europe as opposed to in the rest of the World.
eToro offer leveraged bonds ETFS
eToro, another popular investing platform, also offers a wide range of bonds to choose from and is known for its excellent customer support.
CMC Markets Is Emerging As a Player In The Bond Trading Platform Scene
CMC Markets is another popular choice, offering a user-friendly interface, competitive fees, and a wide range of bonds.
Fees Associated With Government Bonds Investment
When you buy a government bond, there are usually fees associated with the transaction. These fees can vary depending on the type of bond and the market conditions at the time of purchase. Here is a brief overview of the fees you may encounter when investing in government bonds.
When you buy or sell a bond, there may be fees associated with the transaction. These fees can vary based on the size of the bond, as well as market conditions at the time of purchase or sale. Some fees may be flat fees, while others may be a percentage of the sale price.
In addition to transaction fees, you may also need to pay a management fee to the firm that handles your bond investments. This fee can vary depending on the size and complexity of your portfolio.
If you hold your bonds in a brokerage account, you may need to pay custodial fees. These fees cover the costs of maintaining and safeguarding your assets.
When you buy a bond, the dealer that sells you the bond may charge a markup. This is the difference between the price of the bond and the price at which the dealer bought the bond. The size of the markup can vary depending on market conditions and the type of bond.
Some dealers may also charge commissions on bonds. These fees are typically a percentage of the trade value, and can vary depending on the type of bond and the broker’s commission schedule.
When you buy certain types of government bonds, you may need to pay fees to the issuing government entity. These fees can vary depending on the type of bond and the issuing agency.
Where & How To Buy Government Bonds – The Summary
This guide on investing in government bonds explained how this asset can be a great way to diversify your investment portfolio and reduce your overall risk. Once you know the basics of what the various government bonds are, the actual learning process for how to buy government bonds is pretty straight forward.
If you are buying government bonds with one of the trading platforms above such as etoro, or Pepperstone, you simply need to open a long or short position as you would when trading any other leveraged equity or CFD. That is the simple press of the buy, or sell button.
On the other hand, if you are investing into government bonds for longer term planning and risk management and would like to own the underlying bond; you are better off using IG or Degiro. The process then is similar, but you will need to assess clearly the term of the bond and the time duration to ensure that it fits with your own plans.
Each of these brokers operate online trading platforms in order to facilitate government bonds investment very simply, the bigger part of your question will be about where to buy government bonds.
If you are still stuck in a decision making process, feel free to check out our top rated place for trading government bonds below – a free demo account is offered in case you would like to test the platform first and explore a little more for yourself before committing to your purchase.
As always, good luck, and happy trading.